Canadian and US Dual Citizenship Income Reporting

[jessicaphillipsc]

My client is a US and Canadian citizens who resides in Canada and only has investment income from the US. My understanding is that I report all income on the US return, then take a credit for the foreign taxes paid on that income.  Do I just enter this on Form 1116 Parts I and II as dividend and interest income and enter the foreign taxes paid on these amounts or do I use Part III. The amount of foreign taxes paid is greater than the US taxes due so my client now owes no taxes on the 1040. I am concerned I have done this wrong.

[Terry53029]

check this link for straight forward explanation  https://turbotax.intuit.ca/tips/does-having-dual-citizenship-impact-your-taxes-279

[itonewbie]

Good luck with using this article to understand how the US-Canadian tax treaty works.  It has much less info than what we discussed here.

[jessicaphillipsc]

Thank you for the info. I did end up handling it this way. I think the treaty is hard to read, but my understanding is that if they pay Canadian taxes on US interest and dividends, they don't owe the tax again to the US.

[itonewbie]

"I think the treaty is hard to read, but my understanding is that if they pay Canadian taxes on US interest and dividends, they don't owe the tax again to the US."

It doesn't always work that way.  We earn our keep by dealing with the difficult stuff.

[itonewbie]

@jessicaphillipsc How are you able to claim FTC on the US return for US source interest and dividend without referring to and understanding the US-Canadian income tax treaty?

[jessicaphillipsc]

I read the treaty nd it does allow the FTC. You must report worldwide income on both returns and they you are allowed a FTC for taxes paid in Canada. How would you not claim a credit? The treaty was designed to avoid double taxation.

[itonewbie]

You would but there are special reporting requirement for claiming that credit.  Question is how you reported those ***US-source*** interest and dividend income for FTC purposes.

[jessicaphillipsc]

I claimed the interest and dividends on sch B and took a credit on Form 1116. I also read the instructions on the IRs site.

[itonewbie]

@jessicaphillipsc Please see my 2nd response below.

[itonewbie]

Besides, F.1116 instructions do not provide specifics about tax treatments based on treaty articles.

[itonewbie · Accepted solution]

It is not as simple as that.  You will need to refer to the US-Canadian income tax treaty, determine which country has the primary right to tax certain income, what rate apply to which type of income, whether saving clause or one of the exceptions apply, and then how foreign tax credit may be claimed on the US tax return based on these considerations.

[jessicaphillipsc]

The Canadian return reflects the US source income as well as the Canadian income so I do feel the tax treaty says the foreign tax credit is allowed. My only concern is the Canadian tax preparer is telling me that they paid about 30% taxes on the interest, dividends and capital gains. Does  that seem accurate?

[itonewbie]

You seem not to have understood the technicalities.  You may like to re-read my response and review the tax treaty articles in more details.  In case you have more questions after that, please let us know.

[jessicaphillipsc]

I totally do not understand the technicalities. I thought I could take a deduction for the full amount of the foreign taxes paid. I have read the treaty and this paragraph confuses me:

"In addition to the normal rules for the avoidance of double taxation, the Convention contains a rule
not found in either the model or the existing convention for eliminating double taxation of United States
citizens who are residents in Canada. Under Canadian law, the credit for foreign taxes on dividends,
interest, and royalties is limited to 15 percent. Though the United States withholding rates under the
Convention on these forms of income do not exceed 15 percent, United States citizens are subject to
United States tax at normal progressive rates. Under the new Convention the United States agrees to
give Canada the primary right to any tax on such income in excess of 15 percent, with the United States
retaining only a residual right to tax."

My client is going back to Canada so I have to finish this today. Any helpful advice you have would be greatly appreciated.

[itonewbie]

By this time, I suppose you have already applied for an extension on your client's behalf.  You should take time to study the treaty for the aspects mentioned in more details.

There have been 5 protocols to the treaty and what you quoted is from an older one that has been superseded.  Also, re-sourcing pursuant to Article XXIV(6) will be necessary when preparing F.1116 for FTC, in order to alleviate double taxation on that particular type of income to the extent stated in the relevant articles.

[itonewbie]

Furthermore, the treaty assigns a residual taxing right to the US for US-source dividend.  It would be incorrect to claim full credit for Canadian taxes paid on US-source dividend.

[Benhaus]

I have a US only citizen who has received Canadian Royalties. We claim the worldwide income on the US 1040 and of course, take the FTC for the Canadian Part XIII withholdings, do we need to file in Canada to justify the income withheld is correct?  There is no refund of Part XIII withholdings, I am told.

Thanks, Ben H.